Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Vivek Paul – Global Head of Portfolio Research and Natalie Gill – Portfolio Strategist all forming part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
Leaning into risk: We stay risk-on heading into Q4 due to a favorable near-term macro backdrop. Recently choppy markets show why having an investment anchor is key.
Market backdrop: U.S. stocks were flat last week. Two- and 10-year U.S. Treasury yields surged as markets scaled back rate cut expectations that we thought were overdone.
Week ahead: We monitor U.S. CPI out this week for signs inflation is still falling toward the Fed’s target. We see supply constraints adding to long-term inflation pressures.
Market narratives have flipped this year: from buzz over artificial intelligence (AI) to concerns about big tech spending, and from recession fears to comfort in the U.S. economy’s resilience. Our anchor in these choppy markets: viewing this as a world shaped by supply – not a typical business cycle. We stay risk-on as U.S. inflation cools, interest rates fall and growth eases slowly. We stay overweight U.S. stocks, go beyond tech within our AI theme and stay nimble in Japan’s and China’s stocks.
Markets have swung sharply this year. AI buzz gave way to doubts over AI spending. In August, a rising unemployment rate in the U.S. sparked recession fears, spurring markets to expect rate cuts as deep as in past recessions. We said recession fears and such rate cut pricing were overdone. This is not a typical business cycle – it’s a world shaped by supply constraints. The recent rise in unemployment was not due to layoffs but rather elevated immigration expanding the labor supply. Employment growth is still robust, Friday’s job data confirmed. See the chart. The unemployment rate has fallen again and markets have somewhat scaled back Federal Reserve rate cut expectations. Wage growth has cooled, bringing down inflation. Yet that might not last: Immigration will likely fall to its historical level – and no longer offset the decline in the workforce from population aging. That could push up inflation again.
Demographic divergence is one of five mega forces, or structural shifts, we see adding to inflation pressures and macro uncertainty in the long term. Yet the near-term macro picture presents reasons to keep leaning into risk. Cooling inflation has allowed the Fed to cut rates, and growth is not slowing sharply. We see this resilience reflected in corporate earnings strength expanding beyond the tech sector and stay overweight U.S. stocks on a six- to 12-month horizon. Analysts expect earnings to grow 20% for tech and around a solid 8% for the rest of the market over the next 12 months, LSEG Datastream data show. We think the AI theme has more room to run. But as investors question big capital spending on AI by top tech companies, we’ve broadened our AI overweight to other sectors supporting the AI buildout: energy, utilities, real estate and industrials.
Staying nimble
We remain nimble as we eye the U.S. election, geopolitics and big policy shifts globally. We went overweight Chinese stocks after the policy signal from the September politburo meeting suggested major fiscal stimulus may be coming. That doesn’t change the long-term structural challenges we are concerned about. We trimmed our Japanese equity overweight due to the drag on earnings from a stronger yen and mixed policy signals from the Bank of Japan. Iran’s strike on Israel and Israel’s promise of retaliation mark a major escalation in the Middle East. Its market impact has been limited but might grow if there’s further escalation. We stay pro-risk for now. Such events underscore that geopolitical risk is structurally elevated.
Long-term bonds may not reliably buffer against risk asset volatility in a supply-driven regime as shocks that fuel inflation could also push up yields. We prefer quality and income in bonds. We find it in Europe: short-term credit on less tight spreads and government bonds as yields better reflect our policy rate expectations than in the U.S. We like medium-term bonds in the U.S. as markets price in deep Fed rate cuts. On a strategic horizon, we like infrastructure equity and private credit as they look set to benefit from mega forces. Private markets are complex, with high risk and volatility, and aren’t suitable for all investors.
Our bottom line
We use our investment framework as an anchor in volatile markets heading into Q4. A key part of that involves interpreting incoming economic data through the lens of a world shaped by supply constraints – not a typical business cycle.
Market backdrop
U.S. stocks were largely unchanged on the week, masking an uptick on Friday after a strong U.S. jobs report for September. Two- and 10-year Treasury yields surged to about 3.93% and 3.97%, respectively. Meanwhile, markets have somewhat reduced rate cut expectations that we thought were overdone. The U.S. economy added 254,000 jobs in September, well above consensus expectations. Strong job creation alongside easing wage pressures points to a still-expanding labor supply.
This week we eye U.S. CPI to see whether inflation will keep falling toward the Fed’s 2% policy target. Recent PCE data shows core inflation is moderating as consumer spending on goods and services and supply have normalized after the pandemic. Immigration is also boosting the labor supply, cooling wage growth. Yet in the long term, we see structural supply constraints like a shrinking workforce due to population aging making inflation pressures persist.
Week Ahead
Oct. 8: U.S. trade data
Oct. 10: U.S. CPI; Japan corporate goods prices
Oct. 13: China CPI and PPI
Oct. 10-17: China total social financing
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